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News Release


Strong demand reduces Pudong CBD vacancy to six-year low; Residential sales decline as buyer sentiment weakens

According to JLL First Quarter Property Review

​The Puxi CBD leasing market had a quiet quarter in 1Q14, though there was some activity among media and retail firms. “While subdued demand led rents to dip slightly in the overall Puxi CBD market, falling vacancy allowed rents in the Premium Grade A segment to hold flat this quarter,” said Anthony Couse, Managing Director for JLL Eastern China.  Domestic financial firms continued driving take-up and rental increases in the Pudong CBD, leading vacancy there to fall to its lowest level since 4Q2007. In the residential market, sales totals fell in both the mass market and the high end, as tightening credit and reports of price declines in other cities led prospective buyers to adopt a wait and see attitude. Developers opted to hold prices flat as sales reached their lowest level since 2005. Investment activity in Shanghai slowed this quarter, though investors continued to express confidence in the city’s fundamentals.  In the retail market, one core and one non-core project opened as F&B tenants expanded aggressively and several new brands entered the market. Rental growth in non-bonded warehouses slowed in a quiet quarter in which landlords felt rising competition from cheaper projects in nearby satellite cities. Vacancy fell and rents rose in bonded warehouses amid an improving trade outlook and optimism about Shanghai’s Free Trade Pilot Zone.


Media and retail firms active amid quiet Puxi CBD leasing market. In Puxi, most of the leasing deals signed this quarter were for renewal, while the expansion leasing demand remained quiet.  Among all sectors of MNC tenants, media and retail were the two most active in the leasing market. For example, Aegis Group, a multinational media company, consolidated its multiple offices in the city and leased around 18,800 sqm in 5 Corporate Avenue, while Valentino leased about 1,000 sqm in 1 ICC. In light of quiet leasing demand, rents in Puxi continued to drop slightly by 0.9% q-o-q to RMB 9.0 per sqm per day. 5 Corporate Avenue posted noticeable leasing progress this quarter, causing  the vacancy rate of the Puxi Premium Grade A office market to fall. Puxi Premium Grade A rents remained flat this quarter at RMB 10.4 per sqm per day.

Pudong CBD rents supported by continued strong demand from domestic financial companies. The Pudong CBD market continued to witness strong demand from domestic financial services companies as well as energy firms. For example, a local energy company leased around 5,400 sqm in 2 ifc to set up a new office in Shanghai. Due to the combined effect of strong demand from domestic companies and low vacancy, rents continued to grow in the Pudong CBD, increasing by 1.6% q-o-q to RMB 9.6 per sqm per day. Pudong Premium Grade A rents also continued to grow, up 1.2% q-o-q.

Vacancy in Pudong CBD falls to six-year low on lack of new supply. No new projects reached completion in either the Puxi or Pudong CBDs in 1Q14. “In the Pudong CBD, strong demand from domestic companies continued to pursue limited available space, pushing vacancy down to 3.5%, marking the lowest level since 4Q 2007,” said Anny Zhang, head of Pudong Markets for JLL Shanghai.  In the decentralised market, two new projects with a total of 117,025 sqm of office space were completed in Puxi: The Hub Phase 1 (54,032 sqm) in Minhang District and The Springs Offices Phase 2 (62,993 sqm) in Yangpu District. 

Domestic demand to remain strong in 2014.  While MNCs are expected to remain quiet, demand from domestic companies with high rental affordability will steadily increase. In Pudong, strong demand from domestic companies combined with a lack of office supply is expected to continue to support steady rental growth throughout 2014. Puxi stands to benefit as tight supply conditions in Lujiazui cause some Pudong demand to spill over to Puxi.

Demand for Business Parks Remains Strong in Core Markets. Inquiries in the first quarter had a seasonal interruption from the Chinese New Year, but otherwise were stable with 4Q13, with several deals under negotiation. The most active firms came from the pharmaceutical, chemical, and domestic IT and e-commerce sectors.  Multi-national firms based in the CBD are shifting some back office functions to business parks in order to cut costs. Caohejing and Zhangjiang continue to be the strongest submarkets. Caohejing’s limited supply and steady demand support stable rental growth. Zhangjiang has a larger supply pipeline, particularly in its Middle Zone where many companies have been acquiring land to build projects.  Demand among firms for space to consolidate and expand from existing facilities is sufficient to keep pace with supply, however, ensuring a positive outlook for Zhangjiang as well. After several strong quarters, leasing demand in Waigaoqiao softened somewhat, as there has been little recent news about the Free Trade Zone (FTZ), and multi-nationals wishing to establish a presence in the FTZ already have done so.  Domestic firms remain active, though, with strong preleasing in one premium project near the FTZ that is scheduled for delivery later this year.

Strata-titled Office

Large volume of new supply will further unleash pent-up buying demand for self-use purpose this year. Although no new project was launched in 1Q14, projects launched in 2H 2013 provided more options for corporate buyers seeking strata-titled office space for self-use purpose. High-end strata-titled transaction volume reached 23,676 sqm this quarter. Out of needs to upgrade corporate images, more domestic companies became interested in purchasing high-end strata-titled office space for self-use purpose. As a result, the recent transaction record showed the increasing number of large-area transaction deals in the high-end strata-titled office market.  Driven by strong buying demand, transaction prices rose by 3% y-o-y this quarter. It is projected that 13 high-end strata-titled office projects, with total GFA of around 567,700 sqm, will be launched in 2014, thus providing more choices to domestic companies seeking strata-titled office space for self-use purpose. We expect the large high-end strata-titled supply will unleash the pent-up self-use demand from domestic companies this year.


Sales decline as home buyers adopt wait-and-see stance. With news of anecdotal price cuts in several tier II and III cities prevailing in the market, home buyers mostly shifted to wait-and-see mode this quarter. “Coupled with a tightening credit environment, higher down payment requirements and seasonal factors, the weak sentiment led to a sharp decline in sales activity in 1Q14,” noted Joe Zhou, Head of Research for JLLShanghai. Sales volume of commodity housing in the primary market fell by 44% q-o-q or 32% y-o-y in 1Q14, an eight quarter low.

High-end prices flat as sales fall to lowest level since 2005. Three high-end projects launched a total of 587 units in 1Q14, of which 64 were sold. Overall sales in the high-end segment declined for similar reasons as on the mass market, with only 165 units sold in 1Q14, the lowest since 1Q05. In contrast, several mid-market positioned projects targeting upgraders were well-received this quarter. For example, Greentown Splendid Orchid Yard in the Huamu precinct in Pudong – a highly populated residential area – launched 303 units for pre-sale on 8 March and sold 238 units in 1Q14, with prices averaging RMB 53,786 per sqm. After rising for the previous several quarters, primary prices for high-end apartments stayed flat in 1Q14 as sales momentum slowed. Developers mostly held prices unchanged amidst a tighter credit environment and slower sales market.

Rents fall for serviced apartments as competition intensifies. Demand for serviced apartments remained soft in 1Q14 as MNC’s continued to focus on cutting costs. Meanwhile, serviced apartments faced rising competition from surrounding non-serviced apartments as more individual landlords put their apartments onto the leasing market for rental income to compensate for holding costs including the new property tax. More serviced apartment projects offered rental discounts to attract tenants. As a result, rents for serviced apartments declined by 0.6% q-o-q in 1Q14. We expect demand for serviced apartments to remain weak through 2014. As such, new completions this year could further push up vacancies and lead to larger downward pressure on rents for serviced apartments.

Sales volumes to remain low in 2014, but developers optimistic about the future. With no changes expected in policy this year, weak buying sentiment is expected to persist and sales volumes are likely to stay low for the full year in both the mass market and the high-end segment. However, we do not expect sales prices to fall in 2014 due to limited new supply and Shanghai’s healthy market fundamentals. For example, this quarter a large residential-use land plot in the Daning area was sold to Franshion for an accommodation value of RMB 47,609 per sqm, 111.6% higher than the reserve price, reflecting strong optimism among developers towards the residential market in the medium and long term.


Pause in investment activity in the first quarter.  Investment market activity in Shanghai slowed in the first quarter following a very active fourth quarter of 2013. A lower volume of commercial transactions was recorded, partially due to seasonality, although concerns about the strength of the real estate sector in China also began to play a part. That said, most investors remained confident in the fundamentals of Tier 1 markets, Shanghai in particular, and given the large amount of capital raised but still not deployed, we believe that 2014 transaction volumes will still be strong. The impact of slower growth in the office market and increased competition in the retail sector will most likely manifest as a shift in pricing this year rather than a slowdown in transactions. Yields are likely to continue to widen as higher interest rates affect returns and investors reassess their pricing models to account for slower growth rates in the future. Moderating Puxi rental performance is likely to affect investors’ sentiment and lead to a further shift towards a buyer’s market. In Pudong, on the other hand, domestic owner occupiers’ demand for core offices will keep prices high and available assets scarce. In the retail market, huge new supply in decentralized and suburban areas has caused concerns for many investors, although the outlook for mature shopping centres is still positive. This influx of new supply may bring opportunities for investors with retail expertise to partner with underperforming projects in a market with a chronic shortage of tradable assets. In the logistics market, investment demand is still robust, as evidenced by continued interest from private equity players and domestic developers and institutional investors. Stronger demand has caused yields to compress quickly for the few institutional grade properties in this market.

This quarter saw one major office transaction, for Calxon Global Tower, a newly developed office property in Xuhui district that was sold for RMB 1.74 billion to Cura Fund. Elsewhere, the hotel investment market was increasingly active in 1Q14 with three major deals closing. The most prominent was for the JC Mandarin Hotel on West Nanjing Rd. This relatively old hotel was bought for RMB 2.1 billion by a domestic developer, who plans to redevelop the hotel into an office property given its diminishing popularity as a hotel but excellent location in the Puxi core-CBD.


New brands enter market while luxury players expand existing stores. New entrants continue to appear in the market. For instance, Paul Smith opened its first store in Kerry Center (488 sqm) followed by another in Grand Gateway 66. In the mid-range market, New Look from London opened its first store in Metro City. Gap-owned American fashion brand Old Navy opened its first domestic flagship store near Jing’an Temple. F&B tenants expanded aggressively, with a spate of new openings on the floors B1 to 4 of Kerry Centre, and a number of domestic chains opening in non-core locations such as SML and Minhang PlazaAlthough the major luxury houses halted new store openings in Shanghai, some of them expanded high-performing existing stores in mature properties. For example, the existing Burberry store on the ground floor of Grand Gateway 66 took over two adjacent shops and expanded from an estimated 125 sqm to 360 sqm. Tod’s also claimed two adjacent shops in Plaza 66.

Core and non-core markets each see one new project open. After an extended lease-up period, Rock Bund in Huangpu district opened this quarter with 70% occupancy. The property is lifestyle-oriented and is anchored by galleries and high-end restaurants such as Otto e Mezzo Bombana Shanghai and Maison de L’Hui. In the non-core market, Star Plaza in the southwest part of the city near the Shanghai South Railway Station opened with 70% of stores trading; it is anchored by a Carrefour along with restaurants such as Shanghai Min and Costa Coffee.

Rental growth continues at a moderate pace. In the core area, open-market ground floor base rents increased 1.7% q-o-q to RMB 51.3 per sqm per day, while non-core rents rose by 2.6% q-o-q to RMB 20.4 per sqm per day, on average. Vacancy in 1Q14 was flat at 6.5% in the core area and decreased slightly to 5.4% in the non-core market.

Future shopping malls likely to take longer to experience longer stabilization periods. Due to intensified competition and the rise of e-commerce, new retail properties are expected to experience take longer to reach maturity. In the northwest and west parts of the city, this could extend up to three years due to the higher levels of market saturation. New properties will take longer to achieve high occupancy and reach the optimum positioning to be able to generate significant rental growth. As a result, tenants will be able to bargain for better leasing terms, particularly in new properties’ first leasing cycles. “Fashion retailers are cautious about paying base rent in new projects, and F&B operators are getting aggressive about expanding,” said Eugene Tang, Head of Retail for JLL Greater China. Mature, high occupancy properties, on the other hand, will continue to maintain strong bargaining power. Mature properties are also going to see more cases of in-house expansion by major brands, as well as growing numbers of cosmetics specialty stores.



Non-bonded rental growth decelerates slightly in quiet quarter. Demand for non-bonded warehouses in Shanghai in 1Q14 remained subdued compared to the peaks seen in 2011-2012. Inquiry levels were stable with the previous quarter, but a lack of new completions and the dampening seasonal effect of Chinese New Year meant that few major leases were signed. Moderate net absorption in the Pudong Airport submarket was balanced out as an e-commerce firm vacated its space in West Shanghai to build its own warehouses. As a result, overall non-bonded vacancy was flat, rising only 10 bps to 10.6%. While still the city’s most desirable non-bonded submarket, West Shanghai has lost some of its pricing power as tenants show increasing willingness to consider cheaper space in satellite cities like Kunshan. This – coupled with continued soft demand in Pudong submarkets – contributed to a deceleration in non-bonded like-for-like rental growth, from 1.0% q-o-q last quarter to 0.8% this quarter. Kunshan continued to show strong rental growth of 3.4% q-o-q, with the best performing projects located close to the Shanghai border.

Vacancy falls and rents rise in the bonded market. The bonded market was active and witnessed strong take-up. Many deals have been under negotiation in the bonded zones since the 3Q13 announcement of the Shanghai Free Trade Pilot Zone (FTPZ), and interest has risen further as China’s export outlook has improved in recent months. Most of the absorption took place in the Yangshan Port Bonded area in the Lingang submarket, where take-up traditionally had been slow since the financial crisis. A number of deals were completed this quarter, helping reduce overall bonded vacancy from 21.2% to 14.9%. Overall, Shanghai’s bonded rents rose 4.2% q-o-q, as strong inquiries and rising take-up this quarter gave landlords greater pricing power for their remaining space.

Non-bonded rents to continue rising at a moderate pace. Non-bonded rental growth for Shanghai in 2014 is likely to be close to last year’s subdued rate of 4.3%, as Kunshan and other satellite cities compete on rents. There are over 460,000 sqm of non-bonded space under construction and scheduled for 2014 completion. Although nearly 60% of the new supply is located in the traditionally-strong West Shanghai submarket, “leasing progress may be slower than usual, as several projects are multi-storey, rather than single-storey which appeal to a broader range of tenants,” notes Stuart Ross, Head of Industrial for JLL China. Slow take-up there may lead to a rise in market vacancy this year. Bonded rental growth should remain strong over 2014, though it could slow if the trade outlook weakens, or if a lack of progress in FTPZ policy leads to a dampening of demand.


Manufacturing demand continues to improve.  China’s improved economic performance since the second half of 2013 continued to boost confidence among both domestic and international manufacturers this quarter. Demand continued to be strongest in sectors that benefit from China’s strong domestic market, including pharmaceuticals, food products, and auto parts. The biggest change in the market this quarter was policy-related: in late-February the Shanghai municipal government issued tentative regulations that will further tighten industrial land usage, notably reducing the land-use term from 50 years to 20 years, and subjecting land users to more extensive reviews at the end of the term before renewing leases. The new rules are likely to make companies more conservative about setting up new facilities in the Shanghai market. Cities in Zhejiang and Jiangsu provinces have been attracting manufacturers in recent quarters with their low rents and competitive labor costs; as their land policies have remained unchanged, these provinces are likely to see a further boost in demand as Shanghai’s new rules come into effect.